Kiwis show way in handling a boom

Our Reserve Bank has rates on hold, but its counterpart in New Zealand is pushing the pedal to the metal.

The brake pedal, that is. After keeping its cash rate on hold at 2.5 per cent for three years, the Reserve Bank of New Zealand has raised it three times in just over three months, including Thursday's move from 3 per cent to 3.25 per cent.

Full steam ahead: Graeme Wheeler, governor of the Reserve Bank of New Zealand. Photo: Bloomberg

In Australia the Reserve Bank is keeping rates low to encourage a handover from the resources investment boom to the rest of the economy that is definitely maybe happening. New Zealand, meanwhile, is in the middle of a boom that resembles the one that Australia has left behind, and in some ways surpasses it: perhaps it's the new Wonder from Down Under.

New Zealand's economy probably grew by 4 per cent in the year to June, and there are big forces behind it.

One is the reconstruction effort after the Christchurch earthquake in February 2011. Another is a surge in immigration that has created a housing shortage and a supply-side construction surge, in Auckland in particular.

New Zealand has also experienced a commodities boom of its own. Its big commodity is milk products, its big market is Asia and China in particular, and surging dairy prices have supercharged its export income.

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The terms of trade that measure the relative strength of import prices and export prices are the key measure of a trading boom, and the mineral commodities boom pushed Australia's terms of trade up by 56 per cent between 2004-05 and 2011-12.

New Zealand's terms of trade have risen by 17 per cent in a year, and by 52 per cent since the turn of the century.

Both commodity booms have peaked. Here, declining mineral prices have pulled the terms of trade down by 12.7 per cent since the middle of 2012. New Zealand's terms of trade haven't fallen yet, but spot dairy export prices are about 25 per cent below their highs. The prices of other New Zealand exports including beef and lamb are rising, but the recent dairy price weakness will clip farm incomes this year.

Not by enough for the RBNZ to signal that rate rises are over, however. The tone of RBNZ governor Graeme Wheeler's statement on Thursday was more hawkish than expected. New Zealand's economy had "considerable momentum", he said, adding that inflation and inflation expectations needed to be contained, and interest rates returned to "a more neutral level".

New Zealand is both ahead and behind Australia as its growth surge matures.

Its commodity price boom came after Australia's, and was less capital intensive. As JPMorgan senior economist Ben Jarman points out, it also coincided with the construction boom in New Zealand's domestic economy. Construction activity is expected to deliver between 1.5 percentage points and 2 percentage points of GDP growth a year through to 2018.

It's been a two-cylinder boom in New Zealand instead of a one-cylinder one, in other words. Growth has been more balanced than it was during Australia's capital-intensive mining boom and, as Jarman also notes, New Zealand's dairy export boom is drawing on household income growth trends in China and Asia that are more stable than the industrial demand cycle that determines how much Australia gets for its mineral commodities. Both countries are dealing with a strong currency, but it's likely that New Zealand's post-boom adjustment will be less challenging than Australia's has been.

NZ is also ahead of Australia with its post-global crisis budget repair. Boom income that flowed up to the government as tax revenue was not passed on in tax cuts as it was here, and post-global crisis spending was reined in more quickly. NZ's budget is poised to return to surplus this year.

All in all, the new Wonder from Down Under is travelling smoothly. It's in a boom that is more balanced than ours and should be easier to manage as it retreats, is expanding at a decent rate, and its central bank is doing what central banks should do, and moving early to keep inflation in the box. Wheeler said on Thursday that business and consumer sentiment were both tip-top: no surprise there.

Qantas fine-tunes

Qantas is paying more for debt funds after the loss of its investment grade credit rating in December, but recent debt issues are at least pushing repayment deadlines away as it works on its big restructure.

Last month it raised $300 million by issuing notes that pay interest of 7.75 per cent and mature in 2022, and last week it issued $400 million of notes that pay 7.5 per cent and mature in 2021.

It is using the money to repay $450 million of senior debt eight months ahead of schedule, and repurchase $254 million of senior notes due in 2016. That clears its debt repayment calendar in 2014-15, and halves it to $281 million in 2015-16.